One of the obvious options for going into business that we can see all around us on every street corner is a franchise. Should you buy a franchise or start out with your own business idea? This is a big decision, so we turned to someone who knows a thing or two about the topic to enlighten us.
Scott March is a business attorney whose practice focuses on franchises, among other things, and is a member of the American Bar Association Forum on Franchising.
Dennis: Why choose the franchise option?
Scott: Supposedly, and note that I say supposedly, a franchise provides you with a well thought out business model, a training program, intellectual property, an operations manual, and ongoing assistance in running the business. What a franchise provides is expertise. But don’t assume that all franchisors have the sophistication of a McDonald’s for example; there are lots of startups.
D: What about the cost involved in buying a franchise?
S: That varies widely depending on the type of franchise and how well established the franchise is, but it generally includes an initial franchise fee, ongoing royalties based on gross sales, and perhaps a percentage of sales going into an advertising fund. Startup franchisors are eager to sell their franchises so it may be possible to get into those franchises at less cost, but the flip side of that is that they may short you on the help they provide.
D: When you buy a franchise are you buying a store or a territory?
S: Again that varies, but generally you are buying a protected area in which no other franchise of that brand can be established. Another franchisee of that brand can sell in your area — and here think of more mobile or service oriented franchises as opposed to the usual fast food outlets we usually think of — but he cannot have a “brick and mortar” presence.
D: How much autonomy does a franchisee have in running their business?
S: That depends on how much control the franchisor reserves to itself in its Franchise Disclosure Document and to its attached Franchise Agreement. The franchisee is supposed to make all the day to day decisions like hiring and firing, but has to adhere to the Franchise Agreement and this can be pretty controlling, for example mandating the hours you have to be open for business. But the franchisee is still running an independent business and wise franchisors allow local variation to some extent as the franchisee knows his local market.
D: Is the franchisee forced to purchase supplies from the franchisor?
S: Again that goes to the FDD in which the franchisor will disclose what products must be purchased from the franchisor or his vendors and which can be bought on the local open market. But even here, local products have to meet the standards specified in the FDD. If there is a thing uniquely identified with the franchise, like the “secret sauce,” you have to get that through the franchisor. Also big franchisors negotiate deals with vendors to purchase in bulk so it’s to the franchisees’ advantage to go through those vendors.
D: Speaking of “local,” what is franchising like here in Hawaii?
S: It’s difficult. We’re a small market, even though we may not think of ourselves as one, so a franchisor may not be willing to register his franchise here because it’s too much trouble to go through for our size. Also Hawaii is one of perhaps 14 “registration” states with pretty complex laws regarding franchises. Added to that is our geographic uniqueness; we’re the only state you can’t drive around to visit your state’s stores, plus of course there is our distance from the mainland for obtaining training and supplies.
D: Despite those difficulties, should a potential franchisee decide that the value of buying a franchise outweighs those difficulties how does he go about it?
S: First you get hold of the FDD which should be reviewed with an experienced franchise professional. Talk to other franchisees, and not just the ones the franchisor suggests. Google the franchise, check the links on the Federal Trade Commission and Dept. of Commerce and Consumer Affairs websites on how to buy a franchise. And don’t be intimidated or afraid to ask questions. Lastly make sure you’re buying a franchise for the right reason, not because you like the product or for your kids, but because you think it gives you the best chance for business success.
Dennis Boyd is director of the West Hawaii Small Business Development Center and writes a monthly column